Six Timeless Lessons of Financial Planning (and Paradoxes that Come with Them)

July 13, 2023

Episode Transcript

Welcome to EWA’s Finlyt podcast. EWA is a fee -only RIA based at Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you.

And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. Welcome, everybody, to this week’s episode of Finlyt by EWA.

I joined here by Chris Pavcic, lead advisor at EWA. And we are talking about all the perspective we’ve gained, been in thousands of meetings over the last, I’d say 15 years for me, and you’ve been doing this.

You started as an intern in college. How long have you been doing this, Chris? Yeah, since 2017. Thanks, started with you. So we figured today’s episode is let’s look at all of the lessons that we’ve learned from our privilege of really serving, you know, clients with an array of ages and professions and just, you know, hopefully make this a very helpful, impactful episode where people that are inside their financial plans already are thinking about starting a financial plan, can learn from the path of others.

So timeless lessons of financial planning. We’re going to go through six of them. And a lot of these, how to navigate properly, there’s a lot of paradoxes that exist in financial planning as well. So the first one is competing goals.

So, Chris, give us an example of a competing goal. What’s one that we deal with every day? Yeah, I think a good example would be relationship with risk in return for one, for a lot of goals to be on track, like retirement or college planning.

The money needs to be invested, but has to be invested responsibly, because if we take on too much risk, meaning how aggressive we’re investing, then maybe that goal doesn’t get taken care of. So, need to have that right balance and make sure that everything’s aligned so there’s goals actually.

Yeah, that’s a great one. So, you know, there’s ways to do that properly, asset allocation, diversification, or reference to our investment episode that was published a couple weeks ago. You follow those principles and having a financial advisor to really keep you disciplined because, you know, a question I think a lot of clients ask is, did I beat the S &P 500 to Dex?

Which, that’s a goal. But then the question is why is that the goal? Right? Is the goal to beat the S &P 500 to Dex or is the goal to fund your kid’s college, to be financially independent, to leave a legacy for kids, to buy a vacation house when your kids are on your roof, you know, and how do we do that?

If we’re trying to beat the S &P 500 and all that’s our only goal, you’re going to live your life where we’re skipping major milestones, you know, because the market’s down when your life is supposed to be happening, but your life can’t happen because you can’t sell it off.

So that relationship is definitely competition, ideally a good financial plan, you want to get the highest return and also with the least amount of risk as possible. There’s ways to do that for sure.

But give us an example, Chris, just like I think the worst advice personally is, you know, a young person can be really risky and then an older person should be less risky. I actually think it’s the opposite of that because a young person to get great returns on a low amount of money, it doesn’t, it’s a real, it’s grow, then those big returns can become really relevant.

So, you know, one of our philosophies is making sure there’s a safety net so you can realize equity returns, not just till you retire, but literally for life, right, and have the downturn. But just give us an example of why not only an early age, but forever, you know, like, let’s just talk about a million dollars, drops 50, goes back up 50, you walk us through that math.

Yeah, so a good question that kind of gets people thinking that example that you just went through, if you start with a million dollars, goes down 50% and back up 50%, then we ask where we at 99% of the time, we get the answer of a million, but true answer is 70, 750 ,000 because if we get 50% drop, we need 100% return to get back to even.

As you’re down a million, you’re down 250 ,000, so now we’re at 75 ,000, so we’re so missing 250 ,000. So that’s a good point. So, you know, we want to get great returns, but we also want to really prevent those kind of drops, especially later in life.

And so the good advice is a young person can take on that kind of because it’s like, okay, we’re not dependent on the money, but a good financial plan should look at all life stages and not only make sure that the money is there for your life by design, when it matters, a loss is only a loss when you take it, gains only a game when you take it.

It’s having a financial plan that’s structured, so when you realize and need that money, that it’s always at a gain or you have a place to take take it out as a game is a good way to manage this one.

OK, so let’s talk about another one. So another one we see a lot in the affluent space is helping children. And the competition that gets created is enabling children. So sometimes we have clients that want to help their kids so much that they end up enabling their kids.

And just statistically, when you look at a wealth transfer by three generations, whether it’s a dollar, a million dollars, $100 million, a billion dollar, it doesn’t matter them out. Within three generations, like 97% of the money is gone.

And that is because of what we just talked about, helping versus enabling. So give us some examples. And how do we navigate this competition? Yeah, absolutely. I think the best way to navigate it is just having conversations with your kids as early as possible and having those.

Not tough discussions, but meaningful ones, and explaining how you got to where you’re at, how you built the wealth, what it represents. I think a good example is maybe helping for kids college, for example.

We hear that all the time is one of the most popular goals, even oftentimes even more important than somebody’s own financial independence. So paying for the full tuition may result in a lack of motivation and kind of give the opposite effect of what you’re going for.

So there’s definitely that balance of helping them enough, but not enabling them to the point where they don’t have that motivation for themselves. And there’s no science, like there’s no black or white equation for this.

It could be different for everyone. We’ve seen kids thrive after getting undergrad and post grad paid for, and then they become world renowned doctors. And just as an example, like you could say, was that enabling?

Well, no, in that case, that they were set up without student loans, and they stayed motivated the whole time, and now they’re giving back to the world. But we’ve also seen it where it’s like college gets fully paid for, it’s six or seven years to graduate undergrad, and it’s kind of those victory laps that keep happening because it’s so fun.

And then they kind of go into a job that their parents are frustrated with their kids, because maybe they were a physician or a business owner, and the kid potentially just wants to have fun, because they saw how stressed their parents were their whole life, so it’s kind of like this cycle.

So it’s a fine line, and it’s easy to go really drastically one way or the other, especially generational. Great quote. Jameson said this in the state planning, it was like hard times. It’s a cycle, it’s like hard times create, which eventually create.

Think it’s hard times, create hard men, hard men create easy times, is that? Easy times and create hard times. Basically a cycle unless it’s, unless it’s, And it’s less everyone’s allowed to experience adversity and has the ability for someone to let them actually experience that and go through that without bailing them out every time.

Those lessons will just never be carried through. So this is a very case by case. You know your kids best, but working with a professional with the perspective of seeing this go right and seeing this go wrong.

Because there are general principles to follow to ensure that statistically your kids are on the motivated side versus the trust on side. So OK, well some other ones. So tell us, Chris, you work with a lot of our retiree clients.

So this is one we see at best savers are the worst vendors. Yeah, absolutely. We see this all the time, I think, is just a product of getting to the point where you’re financially independent. A lot of our clients have worked in a profession that they maybe really enjoyed as a business owner or a physician where you’re focused on building The company or building your savings and takes a lot of discipline to save in the right places.

So whenever you actually get to retirement and you’re no longer working, the first thing that happens is you’re not saving, which feels weird. And then you have to take that a step further and pull from your savings.

So depending on what the market’s doing, that can make people very uncomfortable just because you’re building this habit of saving and now you’re forcing yourself to spend from that savings. So it’s literally two, you’re breaking an entire habit as you just said, and you have to establish a brand new habit, which, you know, typically at that point, your mind’s kind of made up, it’s developed, and it’s really hard to develop a new habit.

That’s why we see every meeting sometimes with our clients. And I’ve saved a lot of for retirement, and it’s, you know, well, no, we don’t want to leave legacy, well, then spend your money. Well, we can’t.

So like they’re naturally going to leave this huge legacy when that’s not even the goal. So having a really tough calibrated financial plan to give permission and then also help clients establish that new habit and encourage them and help them, you know, design what is your life by design look like is super important.

Absolutely. Yeah, I think you take a lot of clients through it that you have them rank from what’s on scale of one to 10, 10 being most important, one being not important for financial independence and then do the same for legacy is a lot of these, a lot of our clients that we work with, they’re financially independent.

And if they don’t spend it, there’s going to be something left over. So we hear all the time that maybe that financial independence, they say it’s an eight or nine out of 10, but in practice and what they’re actually withdrawing is like a two out of 10.

So it’s out of balance. And which makes their legacy playing a 10 out of 10, right, even if they don’t want it to be a 10 out of 10. Yeah. That’s an interesting one. So a couple of the rapid fires I see, you know, we work with a lot of high achievers.

So, you know, doctors that become highly specialized business owners that have created, you know, from scratch, you know, multi, multi, you know, eight, nine figure revenue businesses. And with high achievers, we see a paradox is that most of the their identity is in what they do.

And so when we ask, what are you saving for? What does your ideal life look like? How do you want to spend your time? This is what trips up most people. If you had to stop working tomorrow, not because you, finance is already taken care of, but they know that.

But if you had to stop working tomorrow, what would you do with your time? We get a lot of blank stares. So having tough conversations, starting to diversify your identity, just like you diversify your investments.

Typically high achievers end up, their weekends are spent with colleagues that they work with. And what they do with their free time is more work to keep up with that high achievement. And it’s a very big paradox.

It got them to where they are, impact on the world. But then without that, it’s, what do we do? And that’s why we see people that could retire 10 years early, probably work 20 years later, because of identity being really tied in.

And that’s a good thing in a purpose -driven career. But figuring out a smooth and clean transition plan with professional help is typically game changing for a lot of high achievers. For sure. So Okay, just to rattle off a couple so I wrote this outline.

So there’s a couple other paradox. We’ve seen Paradox of time, you know, especially in investing like you have The longer the time you have The more compounding interest is gonna work, but then also, you know, we don’t want to over accumulate wealth So then you know spending along the way I Would say in general probably 90% of the population is either living well above their means haven’t saved much or Over draft like drastically ahead of track and then gonna end up, you know, there’s such good savers Like you said they’re not going to spend I would just from what we’ve seen Probably if I were to guess and this isn’t like no statistics to back this up I guess like one out of ten or ten percent of the population is a well calibrated plan Where it’s like we’re really enjoying life right now, but we’re really secure for the future and Every ten years that we look back on life like we can really authentically and genuinely say we don’t have any regrets Like we didn’t over save we didn’t under save.

It’s really hard to do that So it’s not just like a here’s a computer program save put it money in this fund This is a calibrated discussion the calibrated plan that needs to happen every six months for you to stay in that 10% Where you’re not, you know black or white over accumulating or under accumulating security sure So then there’s the Simplicity and complexity, you know a lot of people are Finances are a big stress point.

So they just want things as simple as possible We always give advice, you know only do something that you understand But a lot of good planning is complex and that’s the importance of I think also working with a team of professionals If you don’t have the time to do this yourself is a good plan that you’re gonna have some complex strategy some complex tax strategies that may save you hundreds of thousands a year some complex estate planning Having a professional team to sip Simplify that Because a lot of people will not even start if it confuse if you confuse you lose that’s a quote.

I love Well, if you don’t do this for a living like if I’m gonna go look at a bunch of health stuff I’ll be confused in a second if I really needed something done. I was trying to do it myself I just wouldn’t do it because it was just too complex.

That’s where a professional needs to come in To help that paradox where a good financial plan should be very simple But it should be a professional team taking on the complex topics and tasks off your plate and Simplifying it for you to make sure your money is living Helping you live a life by design.

Yeah, couldn’t agree more more. So the money acting as a support system To make everything else happen. They’ve used that quote in the past, but well Chris Let’s rapid fire through so let’s go we’ve got six of these that was number one It’s just like competing goals and paradoxes and talking through there’s many more But just wanted to provide a high level.

Let’s go right to fundamentals. Yeah, I know you created this amazing outline talk talk to us quickly about What are the and what’s the quote that you said before we started recording some yeah, I’m probably gonna butcher it I think it was Michael Jordan quote Something along the lines of mastering the fundamentals first Rest will come and your attention will Your attention is the only thing that’s gonna change So if you can get those fundamentals down, you’re gonna win, you know, 90% of the game but What we went through Cuz just doing these basic things will you know naturally keep you on track So just rattling through them one creating a budget sticking to it saving and investing regularly whether you’re Setting up a fixed amount dollar cost averaging on a monthly basis Extremely important to eliminate that decision fatigue of is it a good buying day in the market?

You could sit there all day trying to answer that question the best thing looking back just get the money in on a fixed basis Having an emergency fund we always recommend three to six months Between cash and you know flexible investments like an attack will count Managing debt wisely diversifying your assets and then you know simply planning for retirement saving money in the right ways in the right places Then educating yourself and staying informed on you know, the right staying informed and up to date with what’s out there I think a lot of that falls back on if you’re working on it with the team like EWA, you know, we’re our clients are relying on us to stay up to date with that But still staying in the loop and knowing what’s out there is gonna help you like you said Understanding something is very important to actually implement it And then lastly, I think most important one is setting goals and setting realistic goals So without without those goals, we don’t really have anything to plan around So really identifying those goals and prioritizing them is extremely important.

Absolutely. Thanks for sharing that That was a great list so Okay, so number two number one was competing goals have a good team to help you navigate competing goals. Number two is make sure you have the fundamentals down.

Make sure you outsource those fundamentals. Those are all things a financial advisor should do. The majority of those are help the client do in a simplistic way and take the complex off of their plates.

And so number two, matching the fundamentals. Number three, this was a big one. I have a four and a half year old daughter. The statistic I heard is typically parents, I love the quote like one of my clients said, you can only be as happy as your happiest kid.

I found that to be true. You’re always stressed. You’re always working. You want to secure your kid’s future. But the paradox that exists here is if you have a roller stick that represents your entire time, you’re going to spend with your children.

By the time they’re age 18, 80% of that roller stick is used up. So that means after their 18, after that house, going to go off the call and charge their own family, whatever it is, you may be 50 or 60.

Well, even though maybe you have another 30 years to live, only 20% of the time you’re going to have with your kid then exist thereafter because they’re out of your house. So the timeless lesson here is that we’ve seen so many clients work so hard, not spend enough time with their kids, and then by the time the kids are out of the house, they’ve over accumulated, they don’t have a good relationship with their kids because they weren’t there, they didn’t spend the time, and now they’re financially set, but the relationship is not set.

So we’d recommend really have a good financial plan. Make sure retirement’s on track, make sure you’re working hard to make sure all your goals, but also make sure, because realize, remember that paradox with the high achievers, like probably you’re going to work longer, even though you’re stressed, and part of the reason financial plan independence is designing your work, of just being able to do what you want to do when you want to do it, and so realizing that in the back end, there’s probably going to be lots of years you’re going to want to work for identity purposes and purpose purposes, is that design a life where your kids are under your roof that you can be there when you want to be there.

You can go on amazing trips, plan it now, don’t plan it as a dream, as a bucket list thing, plan it now when your kids are under your roof. That’s a big philosophy we have at EWA. For sure, at times the only most valuable resource that you have, not renewable, so.

Absolutely. Okay, well the third one’s short and simple, so, I’m sorry, the fourth one. So the third one’s around kids at age 18, 80% of the time. The fourth one is, money is a great support tool, but it’s a horrible master.

So Chris, how, from a stress level, or just when you look at a new client coming in because they’re stressed if something’s going wrong, talk to us about. how a lot of people end up living based on what their money does or doesn’t do versus taking control and making sure the money is supporting their life by design.

Yeah, so whenever we’re oftentimes sitting down with somebody for the first time or maybe even clients we’ve worked with for a little while, usually the finances or what’s in their bank account or how they’re feeling about their money on a given day can dictate decisions they’re making, whether it’s buying a house or going on a vacation, a car, whatever the decision is.

So quote that we always use is purpose first, money second. So if we can define, like we’re talking about in number two, I think what the fundamentals having clear and goals that are prioritized, we encourage clients to have a top five values list, which we go through with them and having them define what are your top five values, is it family, health, happiness, and why are those important to you?

And if we can get a good understanding of those values and those goals, it makes the rest so much easier and we can create a plan where the money is second and the money’s supporting those values and goals versus the other way around.

Absolutely. And I think part of the way to make sure that money support system is quarterbacking because you have a team of professionals and accountant that turn an estate planner, financial planner, an insurance agent, and you’re going to get different opinions.

So not only are you going to waste your non -reduable resource by time by going to meet all these people, but it’s going to be hard to have a coordinated plan when you’re getting all this different advice and all this different stuff thrown at you.

So one of the greatest ways to make sure that your money is a tool and not a master is to have a quarterback. Not only working with you and your family as like a CFO, you’re the CEO, but the financial team is a CFO.

There’s also one that’s willing to quarterback all those other relationships and say, here’s an attorney. No, here’s their estate planning goals. Bring the attorney in, get them on the same table, make sure everyone’s aligned, and then move forward.

And that can be a huge factor to prevent chaotic balance sheets, balance sheets that require all kinds of attention and time sucking. You know, use 50 things you’re tracking versus maybe just a couple of things.

So that’s a great one. So the fifth one is automation. So there’s many reasons for automation, but I think the biggest reason is decision fatigue. You know, if you, what’s one decision that you can make that can eliminate a thousand decisions?

So one example of this is reverse budgeting. So talk to us about someone that just does a budget that’s tracking every expense versus someone that makes the one decision, do that one time up front and then reverse budget it.

Right. Yeah. So I love the reverse budgeting. I think everybody on our team does this and we encourage all of our clients too as well. So a lot of times whenever we’re… meeting with somebody, they’ll have a spreadsheet that’s a thousand rows long, and it’s tracking literally everything, which we kind of think is useless.

It’s good to have a gauge, maybe do that once or twice a year to see what’s truly being spent. So the whole idea of reverse budgeting is, you know, what’s coming in. And then we want to look at what’s a fixed expense that’s guaranteed to be there every month, like your mortgage, car payment, insurance, daycare, whatever is definitely going to happen on a month -to -month basis.

We want that to go to one account, that accounts on auto pay, so set it and forget it. And then whatever’s left over, if you do that one -time audit per year, or if you just know how much your typical credit card is, then that’s what goes into a second bank account.

That’s what we use to pay off that credit card, and it just eliminates a lot of decision fatigue because the expenses are automated, savings is automated as part of that part of that fixed account. And then, you know, whatever’s left over is, you know, you can spend freely.

Yeah, that just prevents lifestyle. concrete lifestyle inflation. And it guarantees accountability. And I always love, I’ve used this analogy probably with thousands of times in kinds of, or sick of me saying it, but coach, I had trouble getting up in the morning, 5 .30, hit snooze, snooze, snooze, snooze, snooze.

You wake up, you’re missing your workout, you’re missing breakfast, you’re missing out your morning routine, now you’re scrambling, right? And so that’s what I think how most people live their financial planning lives is, it’s too busy.

We’ll set that up later, then years go by, and suddenly your kids are in college, and you haven’t saved anything, or you’re retiring, and there’s not enough save to keep up with your lifestyle. So the way around that is I had a coffee pot, old school, and on a curig, would take it off, the coffee pot off the coffee maker the night before my alarm was set for 5 .30 AM.

I programmed at 5 .35, and so when I heard my first alarm, I then remembered, if I don’t get downstairs in five minutes, the coffee starts automatically, and it’s gonna spill all over the counter. So I had to go down, put the coffee pot on, in that five minutes, which prevented me from getting news.

And so that one decision, then compounded, and led into many, many, many other good decisions, which allowed me to get my day off to a good routine. And that exact same concept applies for the reverse budgeting.

You’re making that one decision, and you’re eliminating thousands of decisions, you’re calibrating that temperature versus it calibrating you, and the other stuff is just meant to be spent, and once it runs out, it’s done.

Yeah, absolutely. So some other examples of this, dollar -cost averaging, saving automatically what to track, like having an automated software of tracking your net worth, not tracking what you spend.

There was healthy tracking, there was unhealthy tracking. There’s many ways to automate, and then obviously a good financial team can automate the majority of your financial life. For sure. Okay, last but not least.

So a successful financial plan. Number six, a successful financial plan can be measured by the amount of uncomfortable conversations one has. That can be uncomfortable conversation with their advisor, with the other professionals, especially with their kids.

So Chris talked to us about this one. Yeah, so I think this could be a principle that you could apply to many areas of life, not just financial planning. But I think for us as financial advisors, it would be so easy for us to say we meet with somebody that’s retired and they have plenty to live off of with their portfolio between social security.

Maybe there’s pensions coming in where all of their expenses are covered, but they’re on track to leave this big legacy. It would be very easy for us to stay on autopilot and just keep the status quo versus going back to that ranking of 1 to 10 with financial independence and legacy, how important are those two things for you?

If somebody told us that their financial independence is a nine out of 10 importance, meaning they wanna maximize what they’re able to spend from their portfolio, but they’re not doing that, we could easily say, okay, that’s fine, we’re just gonna keep managing the assets, or we could challenge them and actually drive their plan to get to that nine out of 10, where we’re actually moving the needle versus just putting things on autopilot.

But. Absolutely. This also goes with kids. So, if kids are asking for money, if you’re gifting the kids, having the uncomfortable conversation of, here’s the values we have, here’s the principles we have in investing, and teaching those to the kids versus just handing them money to try to fix a relationship.

That the time that you’re gonna spend with your kids is gonna be 100X more impactful, and the tough conversations are gonna be 100X more impactful than the money that you end up giving them while you’re living or when you pass.

Absolutely. Well, thanks everybody for joining us. Those were our six timeless lessons and paradoxes in financial planning. We look forward to joining you next week for next week’s episode, and please, if you haven’t already, hit the subscribe or follow button, depending on what platform you listen to this podcast on or watch it, and please also leave us a rating.

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